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August, 2010

Issue : 3
CONTENTS
ARTICLES

1. India's financial sector in 2020 ........................................................................................................01


Ms. Shikha Sharma, Managing Director & CEO, Axis Bank

2. Indian Financial Markets-2020 .......................................................................................................04


Mr. Amit Chawcharia, Director,Global Markets, Citi, India

3. 2020 - Looking into the crystal ball .................................................................................................11


Ms. Naina Lal Kidwai, Group General Manager and Country Head, HSBC, India

4. Mapping infrastructure investments for 9% structural growth.......................................................14


Anup Bagchi, Executive Director, ICICI Securities Ltd

5. 1 crore to 5 crore investors: Opportunities and Challenges ............................................................18


Mr. Praveen D G, Asst. Vice President, Research & Product Development, MCX-SX

6. Indian Financial Markets-2020 ........................................................................................................23


Mr. Sunil Godhwani, MD & Chairman, Religare Enterprises Ltd.

INDIAN ECONOMY-AN UPDATE ..........................................................................................................27

POLICY UPDATES .................................................................................................................................30


Banking sector
l
Capital Markets sector
l
Insurance sector
l

SURVEYS ...............................................................................................................................................35
FICCI Economic Outlook Survey July 2010
l
FICCI Quick Survey on Yuan Exchange Rate Flexibility – July 2010
l

SYNOPSIS OF PAST EVENTS........................................................................................................... 41


FICCI's Health Insurance Conference, 30th July 2010 New Delhi
l
Seminar on Disaster Management, August 11,2010
l

FUTURE EVENTS .................................................................................................................................. 43


9th Edition of FICCI-IBA Global Banking Conference
l
Seminar on IFRS- September 2010
l
'Empowering India's MSME Sector' Ahmadabad, 18th September 2010
l
FICCI's Conference on Pension October, 2010, Mumbai
l
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in the articles.
ABOUT FICCI
Established in 1927, FICCI is the largest and oldest apex business organisation in India. Its
history is closely interwoven with India's struggle for independence and its subsequent
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in policy debates that are at the forefront of social, economic and political change. Through
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issues is sought out by think tanks, governments and academia. Its publications are widely
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with 79 countries around the world.

A non-government, not-for-profit organisation, FICCI is the voice of India's business and


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SMEs and MNCs, and an indirect membership of over 83,000 companies from regional
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PREFACE
In its role as a facilitator, FICCI has always been at the helm of affairs of
pertinent economic and policy issues. To carry forward our endeavour
of being an integral part of policy affairs and value added resource to
our stakeholders, it gives us immense pleasure to bring to you the third
issue of our widely circulated and appreciated Banking and Finance
Journal. Eminent people from various industries contributed towards
the success of our last Issue and expressed their views on finding ways
and means for meeting the funding needs of the Indian Economy.

Current issue of our journal aims to bring to the forefront perspectives of experts from India
Inc. and financial sector intermediaries on 'Indian Financial Markets-2020'. The Banking and
Financial Services sector over the years has seen keen participation from domestic and
foreign fronts; this sector has played a vital role in partnering growth over the past two
decades by effectively intermediating funds for the capital expenditure requirements,
channelizing domestic savings and inducing capital flows from the developed markets to
India. Going by the trend, financial markets will be a key pillar for growth, fuelling the Indian
economy. Through the voice of some of India's leading names of financial sector, this issue
reflects on the pending reforms and future road map of Indian Financial sector over the next
decade.

We thank our partners MCX for extending their support to help achieve our endeavour.

We do look forward to views and suggestion from the readers to help us improvise the
content of the journal and make it more relevant and informative.

Dr Amit Mitra
Secretary-General
FICCI
ARTICLES

India's financial sector


in 2020 Ms. Shikha Sharma
Managing Director & CEO, Axis Bank

The financial sector will A brief overview of developments in increasingly important role in raising
evolve in tandem with the the financial sector might help risk capital for India's substantial
provide some perspective to our investment and acquisition needs.
transformation of the real
thoughts delineated below. India has Continuing process reforms have
economy a high savings rate, approaching or created a robust and efficient
It is always challenging to divine the surpassing those of Asean countries, infrastructure for equities trading,
shape of things to come: unmet providing access to a stable source of clearing and settlements. Amongst
needs, new technologies, consumer funding. At the same time, India's other financial segments, one of the
preferences and, most importantly, financial sector remains most visible transformations
the spirit of innovation and predominantly bank centric, inter alia following these reforms was the
enterprise. Fortunately, the contours due to debt markets not having development of the life insurance
of the evolution of the financial sufficiently matured and deepened. industry, which responded to
sector might be somewhat more The banking sector, the predominant customer demands for highly
amenable to description; In India, provider of debt finance, has grown customised products and prompt
these are likely to be shaped by the commensurately, at a CAGR of 19 service.
fundamental drivers of economic and percent over 2004 to 2010, and is
social developments. increasingly profitable and efficient.
It has managed to contain a
One of India's key economic strengths moderate deterioration in asset
is a dynamic financial sector, which quality, even while passing through
has played a vital role in partnering one of the worst downturns in recent
growth, effectively intermediating memory.
funds for the capex required. This
interaction will rapidly increase, with However, given the increasingly
funding and credit lines being vital for complex financing structures for the
initiating and sustaining economic funding profile of India's corporates
expansion. Rather than dwelling on capex needs, many capital markets
the financial sector, particularly the segments have emerged or have
banking industry, per se, this article transformed, as has access to global
attempts to envision some changes in capital pools. Equity markets, in
the real economy that will define the particular, have played an
contours of the financial sector.

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The changing profile of through credit delivery.


India's economy Distribution has been an
impediment for increasing
The Indian growth story is largely a financial access, but this is likely
domestic demand, savings and to be mitigated. Technology plays
investment led theme. The story a critical part in providing this
actually began in the decade of the "last mile connectivity" and in
Nineties, with reforms fostering reducing the service delivery
administrative, economic, market, costs on a per-transaction basis.
fiscal and financial liberalisation.
2. Increasing urbanization, yet with
There was a move to markets and
a more efficient agricultural
market-determined prices, relaxing
logistics chain, will increase rural-
the maze of administrative rules and
urban linkages:
controls, opening up sectors to
competition, allowing foreign The most significant
investment and participation in transformation of the past The above consumption trends
India's growth and integrating with decade was a shift in the fulcrum will be augmented by changes in
the global economy. of consumption towards the global supply chain,
emerging countries. This will increasingly driven by the people
These changes will result in the
become more pronounced, and knowledge resources of
acceleration of certain trends,
driven largely by two features, emerging markets. India's
already evident, enabling sustained
although at different time scales. growth will open new markets,
high growth into the next decade.
In the short term, slow growth increase its interactions with
These trends will, in turn, define
and high leverage in developed existing ones, in the quest for
basic financial needs, with
markets will remain an endemic new markets, industrial inputs,
concomitant changes in the financial
and structural feature of their technologies, management
sector. Five of the most distinctive of
consumption, and the gap will be expertise and global finance.
these structural trends are
filled by growth in emerging Opportunities for trade finance,
delineated below.
markets. Over the longer term, funding mergers and acquisitions
1. Inclusive growth will be fostered the significant under-penetration and capital raising are likely to
through technology and of all product and service increase rapidly. In addition, the
distribution innovations: segments in countries like India off-shoring process is likely to
Maintaining a high 9 percent plus will be the opportunity. In transform, with global
growth trajectory requires, particular, India's retail financial multinationals focusing on a
among other things, the penetration remains very low, range of innovations, not just to
assimilation of lower income compared even to its emerging cut costs but develop products
households into the formal markets peers. for more price conscious
financial system. This is emerging markets.
3. Deepening trade and financial
important, both to tap into linkages with the global economy 4. Increasing manufacturing depth,
savings that have hitherto been will open new financing with vibrant small and medium
inaccessible, as well as to opportunities: enterprises:
enhance productive efficiency

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Even as India's knowledge based will change, becoming more large domestic savings pool. New
industries continue to expand, the complex, with the consequent need participants will emerge and existing
improvement of India's rankings in for more effective mitigation. This ones transformed. Overall, it is likely
many global manufacturing will require the introduction of a that lines demarcating lines between
competitiveness surveys are a pointer whole range of hedging tools and the various segments of the financial
to developing potential for increased derivatives instruments for fixed sector will blur, despite the
manufacturing activity. At the income, currencies, equities and implementation of proposed global
forefront of this will be the SME commodities markets. financial sector reforms.
sector, from where much of the
Greater market orientation will also Finally, there is the issue of
innovations and efficiencies are likely
imply volatility in household incomes regulation and oversight of this
to emerge, and will be a significant
as one of the side effects, complex financial architecture.
financing opportunity.
necessitating increasing use of Through a combination of
A progressive improvement in insurance and pension products. The experience, insight and intuition,
infrastructure facilities has been insurance and pension segments will policy authorities have managed to
partially responsible for the increasing be crucial not just for increasing steer India's economy through the
competitiveness. Although much social security, but are also likely to worst financial crisis on a relatively
remains to be achieved, there has emerge as a catalytic factor in even keel. Even more notably,
been a steady improvement in development of long term debt despite the introduction of new
capacities, which are likely to markets in India, a crucial feature for financial products, the adoption of
continue with the progressive the massive financing needs for risk management practices by market
enabling of appropriate pricing and infrastructure projects. participants, combined with
market structures regulations requiring stringent
How might the role of banks change
solvency margins and adherence to
5. Transactions will become in this context? Even as bond
prudential norms, enabled the
increasingly market oriented, markets mature, and it will probably
financial sector to withstand severe
changing the risk profile of be some time before they sufficiently
business and liquidity shocks.
economic activity, necessitating deepen, banks will continue to play a
new risk management products: dominant role in financing the large To sum up, India will be one of the
capex needs of infrastructure and most significant contributors to
The above developments will result in
corporate investment. In addition, global growth over this decade.
an increasingly market oriented
banks will be the main channel for India's financial sector will be a key
economy, where the profile of risks
intermediating and aggregating the pillar for this growth.

About the Author


Ms. Shikha Sharma is the Managing Director & CEO of Axis Bank. Previously, she was the Managing Director & founder CEO of
ICICI Prudential Life Insurance Company. She has done her B.A. (Hons.) in Economics, and completed her Masters of Business
Administration from the Indian Institute of Management, Ahmedabad in 1980. She has a Post Graduate Diploma in Software
Technology, from the National Centre for Software Technology, Mumbai.
Ms. Shikha Sharma
Managing Director & CEO
Axis Bank Limited

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Indian Financial
Markets-2020
Mr. Amit Chawcharia
Director,Global Markets, Citi, India

India: Current Scenario fairly liquid currency market on the development. Only a very limited set
Over-The-Counter (OTC) platform. of Interest rate derivatives product
India is already a trillion dollar The existing Financial Infrastructure are currently available and mostly on
economy ranking amongst the top in the form of efficient exchanges, the OTC. We have a relatively
Countries in purchasing power terms clearing infrastructure, stringent nascent organized Commodities
and growing at a very rapid pace. regulations around banking, financial trading but growing at a rapid pace
Financial Markets in India is probably disclosure norms and corporate through the exchanges mechanism.
one of the few infrastructure areas governance stemming from a sound This is in itself a sea change from the
where India can feel proud of and legal system based on common law unorganized localized mandi trading
compare itself with the best in the principles, makes us as one of the that exists in most parts of the
world. The Banking and Financial attractive emerging markets that can country today.
Services sector has seen a good mix facilitate investments from both
of domestic and foreign Some of the problems being faced by
domestic and foreign investors. We
participation. A lot of development the Indian economy include high
also have an economy with very
in the financial markets that has inflation, growing employable
robust savings rates of 35% that
facilitated this growth can be traced leads to a healthy Domestic Investor
back to the post '91 reforms. So in a appetite for funding the capital
sense these developments are fairly market needs. This is also helping us
recent and that helps us in not having as a country to mitigate some of the
to deal with too much of legacy problems associated with the global
issues that are probably plaguing financial crisis linked to over
some of the developed markets. leverage, high dependency on
We have a fairly developed and liquid foreign capital and associated
exchange traded Equity Markets that vulnerability of domestic currency.
offers a world class trading and The Corporate Bond segment is still
clearing platform. We also have a at a nascent stage and needs a lot of

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population without adequate job agreement to cut down fiscal recovered strongly. This has helped
opportunities, high fiscal deficit and deficits by 50% by year 2013 to improve global demand
low tax to GDP ratio. conditions. But inflation and capital
Move toward exchanges & central
l
inflow pressures leading to sudden
Global markets scenario counterparty / clearing houses
currency appreciation pressures and
from OTC and thereby mitigating
monetary shocks in many of these
The Developed world is recovering counter party risks and increasing
economies including India are now
from an unprecedented financial standardization and transparency
raising difficult policy dilemmas.
crisis that not just eroded financial of financial products in world
capital but also shaken Sovereigns wherein the derivatization of all India implications for the
and investor confidence. This is asset classes and even abstracts
next decade:
leading to major Financial Reforms including yet-to-be-released
including some of the following: Hollywood commercial cinema is The foresight of our Regulators and
happening. the measured policy making has
US Congressional negotiators have
l
helped us avoid some of the above
approved the most sweeping Basel norms (BIS) - The Basel
l
problems that are plaguing the global
overhaul of U.S. financial Committee is well advanced in its
financial markets. There is now a
regulation since the Great preparation of regulatory reforms
need to prepare India for the next
Depression, reshaping oversight of addressing the core elements of
decade. Global economic order
Wall Street. Lawmakers are bank soundness - capital, liquidity
would change towards the now so-
working at restricting proprietary and leverage.
called emerging economies - these
trading by banks and oversight of
Compensation models of financial
l economies will have a lion's share of
the derivatives market;
firms changing to encourage growth in the next many years and
The World is getting together to
l calculated risk taking probably would be amongst the top-
agree on financial hygiene tier economies. China and India
Over the past year, growth in many
reflected in the recent G20 would be amongst the forefront.
emerging market economies has

GRAPH DEPICTING % GDP SHARE OF INDIA & CHINA- PAST, PRESENT & FUTURE

Source: CIRA estimates based on data from Angus Maddison, 2001, The World Economy: A Millennial Perspective, and, "The west and the
rest in the world economy: 1500-2030"

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Some of the expected developments across various financial deciding the investments based
in the Indian markets include instruments with differing risk on its merit.
profiles and tenor
Corporate sector becoming global
l Consolidation of existing series of
l
and is aspiring for much more Financial inclusion is a must to
l Government bonds to improve
growth in scale and complexity. tackle growing income disparity, liquidity and facilitate better price
That would require a much larger rising unemployment, to avoid discovery
sized financial intermediation and social unrest and associate issues.
Linking of small savings interest
l
accordingly the scale and risk
These would require changes in the rates to variable market
appetite of Indian financial
regulatory framework on one hand benchmarks. Even the banks
Institutions needs to grow as well
to support such growth while on the would need to get the flexibility of
to keep pace.
other hand prevent the kind of offering more than vanilla
India needs to pay attention and
l excesses seen in the developed deposits i.e., structured deposits
do a war-footing execution in the markets. linked to variable market
physical Infrastructure space. This benchmarks viz foreign exchange,
The resultant implications and
is already being a bottleneck for equity indices or commodities.
shaping up of the major constituents
industrial growth and causing This will also give a wider segment
of the Indian financial markets is
every day issues for the residents of society access the capital
attempted to be captured below:
of the country both at rural as markets indirectly;
well as urban centers. Be it Fixed Income Markets
Need for a special hybrid debt
l
transportation for people or
Expansion of Corporate Bond
l instrument that will change the
movement of goods, power for
markets: Required changes that standard risk-return paradigm; For
industry and domestic
can lead to the expansion of the example: a long term
consumption, housing or even
Corporate Bond market would be infrastructure funding need could
providing safe drinking water for
- means to off-load credit risk, be funded through a hybrid debt
residents - a lot needs to be done
uniform stamp duty, screen based instrument wherein the interest
and all these infrastructure
trading, clearing house amount could be linked to the
creation would need lot of
settlement; increase in secondary
financing of a different nature and
market activity and thereby assist
magnitude along with a Public
in transparent price discovery and
Private Partnership (PPP) model.
avenue for early exits for investors
It would be pertinent in that light
and consequently also lead to
to have a financial market that will
more Issuers of long tenor debt
support the infrastructure funding
requirement of this nature and Gradual relaxation of investment
l
size. restrictions and forced rule based
buying on long-term investors
Financial intermediation by
l
such as insurance companies,
channelizing the growing savings
pension funds and Banks. This will
of the domestic population to the
give the required flexibility in
funds-hungry corporate sector

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performance of an existing equity / l Hitherto we have largely been a advanced set of investors chasing
infrastructure index benchmark or net receiver of foreign capital; a differential risk-return profile.
linked to inflation however there is tremendous
Role of program / algorithm
l
opportunity for domestic money
Foreign Exchange /Currency markets trading is expanding thereby
flowing out to chase global
making the underlying markets
l Regulations need to be more opportunities. Further
more liquid and to facilitate this,
relaxed - capital account liberalization in this space
execution cost needs to be
convertibility to be implemented required to provide Indian
reduced further - both from
further both for inward receipt of investors the choice and taste of
trading platform providers as well
capital as well as outward flow of global opportunity and associated
as various state levied duties or
capital, relaxation of FDI in diversification benefits.
central government levied taxes to
insurance and other restricted
l With US $ is losing ground as the encourage the growth and
sectors thereby increasing access
world's reserve currency, India has associated liquidity in the
to more intellectual capital and
be prepared to manage its Fx markets.
associated products and
reserves in a more productive
efficiencies The investor participation is fairly
l
manner.
shallow considering the size of the
l Risk management tools in
Equity Markets economy. Both direct as well as
Currencies including Fx Derivatives
indirect investors through Mutual
need to be made more flexible to While we have an efficient
Funds, Insurance and Pension
allow Indian companies access to framework for equities trading on
Scheme needs to be further
same type of hedging avenues as the exchange in the form of liquid
promoted. We have the
are available to their competitors cash and Futures & Options on
advantage of high savings rates
globally. Banks, as providers of primary indices and large cap stocks,
that if channelized properly can
these products, will have to play a we still need to further the equity
become a measured and
very important role in this process derivatives space in a measured
consistent source of capital. This
to ensure that while the growing manner. The general educated urban
corporates access these population in India is quite familiar
instruments to better manage with equities and has a long tradition
their risks they should not of equity trading.
succumb to some of the mistakes
l Supplementing the existing
committed by their global peers.
standardized exchange-traded
l Exchange traded currency products with some more
products need to be expanded to customized and innovative
provide ease of access, products; there is possibility of
transparent pricing and alternate having more sophisticated and
risk management & trading tools bespoke products including third-
to retail as well as institutional party warrants and hybrid capital
clients. market instruments getting listed
on the exchange platform for the

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will also help moderate the Regulatory reforms are required in


market dependency on foreign this space keeping in mind the
money. learnings from the international
space.
Professional money management
l
- There is scope to reduce cost of With the growth in size,
l
entry, inculcate genuine geographical expansion and
professional fund management complexity of Indian Corporates,
and making the products there will be significantly more
transparent and investor friendly credit requirement for organic
in an environment that facilitates growth as well as potential
healthy competition amongst leveraged buy-outs. The banking
various fund managers in a level sector would need to re-align
playing field. themselves in terms of ability of
assessing complex credit /
Financial literacy - There is no
l
transactions as well as ability to With the internationalization of
l
substitute to financial literacy.
defuse risk in other geographies financial markets domestic
Hence an investor education
and meeting the associated risk commodity prices have largely
program on a massive scale
adjusted capital requirements. aligned themselves to
should be implemented through
international prices - We would
various medium and In the retail credit space, the
l
need to de-politicize this space
intermediaries associated with the creation of centralized Credit
and free up international trade to
financial intermediation. With the Bureau (CBIL) is already a step in
accommodate free import &
sheer number of potential the right direction, with the
export of commodities keeping in
investors in India the economies advent of UID, this process can
mind the domestic price
of scale would kick in thereby further strengthen to provide a
sensitivity and genuine needs of
justifying the reduction in very comprehensive mechanism
the domestic producers and
absolute amount of associated for credit monitoring and thereby
consumers.
fees. growing the financial inclusion in a
constructive manner with Policies to ensure that producers
l
l Increasing healthy competition
contained credit losses are adequately incentivized and
and having multiple exchanges
intermediation costs are limited to
with smart order routing systems Commodities
the value addition rather than
to ensure best price availability to
Create a regulatory framework to
l increase in costs to end-consumer,
investors across exchanges and
ensure adequate economic risk thereby ensuring food security for
cross-margining would make us
hedging mechanisms are in place the nation with probably the
further progress in this regard.
as in an uncertain global climate, maximum number of people
Credit commodity price volatility for both
Commodities are also becoming
l
producers and consumers has
l Credit trading is an essential pre- investment asset classes in
taken on a different meaning
requisite for the development of themselves, people are investing
altogether
the corporate debt market. in Gold, Silver and other

08 FICCI's Banking & Finance Journal


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commodities in a big way. A lot of size and associated benefits are change the way our rural economy
investors will be chasing inflation enormous. The existing postal functions.
adjusted returns and commodities network should also be harnessed to
Tax reforms: Currently, only a small
can provide the necessary give effect to this goal.
percentage of population is paying
underlying benchmark.
Based on a recent published taxes. There is a need to have a
Global warming will become a
l statistics, there are more people on simplified, less burdensome and
much more serious consideration the social networking sites than on stable tax regime for stake holders to
in the next decade; Emission our national depositories i.e., there take a balanced decision. Multiplicity
reduction and energy sufficiency are 31 million social networking of bilateral treaties leading to
consideration will evolve and grow individual accounts Vs only 17 million preferential treatment to investors
multi-fold. An economic platform demat accounts holders - there is coming from certain geographies
to monetize and support this clearly a emerging class of individuals may not remain. Tax compliance
change including carbon trading, who would be looking for financial should increase multifold with the
funding of alternate fuel projects, products simplification of rules, technological
etc would be required. progress and implementation of UID.
Technological changes are
Government needs to show judicious
Others unpredictable but one can safely say
use of tax money and bring in more
that the world will not be the same
Banking - India needs another green accountability to reduce / eliminate
as it is today and the pace of change
revolution - this time of a different corruption and increase tax
would be much faster than what we
kind i.e. financial inclusion that compliance. The Direct Tax Code
have experienced in the past decade.
includes providing access to banking implementation, uniform Goods &
Technology can change lot of things
& financial services to the entire Services Tax (GST) and rationalization
for example, the biggest competition
population. We need to ensure that of subsidy - oil price decontrol are
to camera makers today are not from
banking both in terms of channelizing steps in the right direction. Over the
any other camera maker but from
of savings as well as availability of next 10 years, given the right political
mobile manufacturers like Nokia!
credit to the majority of our people. will, it is not difficult to envisage a
Similarly one can expect healthy
This is a challenge worth taking for scenario where subsidies are
competition amongst the various
the banking sector as the opportunity reduced to bare minimum and get
money channelizing agencies
replaced with direct financial
including Banks, Asset management
assistance to the needy sections of
Companies / Mutual Funds and
society, tax base widens to entire
Insurance Companies. Maybe the
earning population and fiscal deficit
telecom operators become the
gets converted into a surplus
biggest distributors of financial
products. There is a huge scope to Unique Identification would be a
use technological progress to expand great enabler including ensuring
the reach of financial products to the financial inclusion, tracking of
masses in a low cost scalable beneficiaries of various government
manner. Mobile / virtual banking if assisted programs / subsidy; checking
deployed by the financial sector can corruption & misuse of resources;

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containing credit losses of financial favorable demographic profile, India certainly lead us to become a global
institutions, immigration control, shall be the leading consumer and a financial center for intellectual
social security and electoral reforms. large trade partner for the world. We capital.
With this data mining in place a lot of shall have many of the home grown
Lastly, am intentionally not
strategic policy level initiatives can be global corporations providing world
pronouncing or making any
focused and channelized for the class products and services. By
predictions on the expected interest
general good of the society and avoid creating a Rupee symbol we have
rates, $-Rupee levels or the Sensex
pilferage and misuse. already included ourselves amongst
as I guess will leave that to the
the very few global currencies to
India is already a trillion dollar Octopus and the Parrots of the
have a unique symbol. This will go a
economy and looking to grow multi- world! Their vision seems to be
long way in building brand-India. One
fold in the next decade. India is on 20:20.
advantage India possesses that is
the agenda of all meaningful
probably second to none is that of Look forward to India playing a more
financial services firm globally and its
having one of the most educated, meaningful role in the Global arena
importance shall only rise in the
english-speaking youthful supported by a comprehensive and
years to come. With a strong
demographic profiles and a good mix robust financial markets platform.
domestic consumption story and
of entrepreneurial talent. That can

About the Author


Mr. Amit Chhawchharia is the Director within the Global Markets unit of Citi in India. He is currently working as the Treasurer
for Citi's NBFC i.e. Citicorp Finance India Limited.
He is a top ranked Cost Accountant (ICWA), qualified Chartered Account and Company Secretary. He has more than 11 years
of experience in the financial services domain covering finance, transaction banking, security services and treasury functions.
Mr. Amit Chawcharia
Director,Global Markets
Citi, India

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2020 - Looking into


the crystal ball
Ms. Naina Lal Kidwai
Group General Manager and Country Head, HSBC, India

T he world expects India to


achieve double-digit growth.
The world expects India, with
some other emerging markets to
Admittedly, the government and all
regulators are aware of this, and the
process has already begun. I also
understand that some reforms may
take longer than others to be
analysis of projects. This, in turn, has
been made possible by the
development of a swap market for
long tenors, with the introduction of
a term money market benchmark
drive the global economy; and both
implemented, but it is my dream that rate; the RBI has eliminated SLR on
India and Bharat want the growth to
if I were to wake up in the year 2020, interbank borrowings, thus aiding the
be sustainable and inclusive. Is it I would find a strong, diverse, development of a term money
possible? Can India meet the functional, efficient financial system
market. This has allowed investors
expectations of the world and its that is an able partner in the growth
like banks to swap long tenor bonds
citizens – the answer are an of the economy, and supports and
unequivocal Yes; provided that is, attracts investments.
that a few issues are addressed. I would wake up to find:
As the country undertakes this
Deeper, wider, stronger
journey towards growth at a faster
Indian Debt Markets
clip, the financial sector that
comprises of financial institutions, The infrastructure development
financial markets, financial initiatives are in full swing with
instruments and services, will be multiple avenues for long-term
both the highway and the fuel that funding, thanks mainly due to the
will enable it to reach its destination, avenues available to infrastructure
and thus will need to be on top of the issuers to issue long term debt paper.
list of sectors where reforms are What's more, these issuances are at
undertaken on an urgent basis. fixed rates to make cash flows
predictable thus assisting viability

FICCI's Banking & Finance Journal 11


ARTICLES

investments with additional tax


incentives for investors to participate
in the bonds market. This has
increased participation of High Net
Worth Individuals and retail
investors in the debt market.

Savers have been incentivized into


investing in long-term debt
instruments through concerted
efforts to create a debt market,
which has brought in much-needed
liquidity into the market, and
increased attraction for debt
instruments of longer maturity.

Another important development that


has taken place is that a corporation
to guarantee debt issued by
into floating rates in line with their The Investment guidelines of long infrastructure finance agencies and
cost of funding and thus participate term investors like Insurance municipalities has been set up, to
companies and Provident/Pension encourage a wider issuer base.
in long tenor bond issuances. Banks
Funds have moved towards a risk-
have also been permitted to float 10
based investment norm rather than Insurance
to 15-year tax-free bonds to raise
investments patterns based on issuer
long-term resources specifically for The issue of under-penetration of the
specifications (GoI, State
financing of infrastructure projects. insurance sector has been addressed,
Government, PSU etc). This kind of
investment pattern used to stymie and easy-to-understand insurance
Foreign institutional investors (FIIs)
the development of the market and schemes are available for a much
too have been encouraged to enter
larger section of the population,
the long term bond markets and they would vitiate pricing dynamics
denying financing to even Public- especially in rural areas in line with
no longer prefer to stay in the short
Private partnership infrastructure other emerging market economies.
end of the market, as they used to
projects. We would also have This has happened largely due to
in 2010. The withholding tax (WHT)
multiple large domestic pension active insurance sector reforms,
framework has been changed. Also, including liberalization of investment
since FIIs require to hedge their funds, insurance companies, mutual
norms by foreign partners, bringing
currency risk and at times their funds and investors to invest in
in much-needed capital into the
exchange rate risk, they are able to these longer term instruments. sector, and introduced best practices
enter into currency swap and that have unshackled the industry.
Under the Direct Tax Code, investors
interest rate transactions, in line continue to be offered incentives to
with global markets. invest through Mutual Funds for debt

12 FICCI's Banking & Finance Journal


ARTICLES

Banking sector ideas and learnings and adoption of


best practices. Technology, namely,
The banking system remains, as the mobile telephone has enabled
always, the most dominant segment banks to reach out to the remotest
of the financial corner of the country, and an
sector. Indian banks continue to be increasing number of people have
well-regulated, and under the been brought into the formal banking
regulator's watchful eye, have and financial services system.
emerged stronger. More importantly, On the lending front, better flow of
the government's steps to ease information and a central database of
capital constraints faced by Indian citizens and corporates have led to
banks have resulted in consolidation better data available to financial
in the banking industry. In fact institutions to make their lending
today, there are a number of Indian decisions. Lenders are able to gauge
banks in the list of the world's largest
the credit-worthiness of borrowers
banks, and they are well-capitalised If the above scenarios were to come
in a more informed manner when
and in a great position to support true, it would mean that the financial
they approve or decline a loan and
Indian companies as they expand into sector has taken large strides
also in pricing the loan appropriately.
newer markets and geographies, towards greater efficiencies and
The credit infrastructure that began
organically and through mergers and strength, and the reforms
with the Credit Information Bureau
acquisitions. implemented have worked their
has borne fruit. The legal framework
With increased competition the magic. Mumbai would be emerging
has also undergone changes, making
customer has seen higher standards as a global financial centre and the
it easier for lending institutions to
of service delivery. Several foreign recover their loans without resorting rupee as a global reserve currency.
banks have acquired Indian banks, to cumbersome, expensive and time Reforms will remain, as they do now,
and Indian banks too have acquired consuming litigation, and in turn, a continuous process to enable us to
some foreign banks, and this has make the formal lending system adapt to the changing environment
resulted in the cross-pollination of accessible to the really needy around us and ensuring we emerge
members of society.
stronger.

About the Author


Naina Lal Kidwai is Group General Manager and Country Head of HSBC in India, which employs 35,000 people comprising
Banking services, Insurance, Asset Management, HSBC Securities and Capital Markets, Retail broking, HSBC Software
Development (India) Private Limited and the Global service centres (BPOs servicing HSBC's operations in the UK, EU and USA).

Her international engagements include being a non executive director on the board of Nestle SA, Chairman City of London's
Ms. Naina Lal Kidwai Advisory Council for India, Global Advisor Harvard Business School. She is on the Governing Board of NCAER, Audit Advisory
Group General Manager Board of the Comptroller and Auditor General of India, and on the National Executive Committee of CII and FICCI .
and Country Head
HSBC, India Ms. Kidwai has been repeatedly ranked in the Fortune global list of Top Women in Business, in the Wall Street Journal and
Financial Times Global Listing of Women to Watch and listed by Time Magazine as one of their 15 Global Influentials 2002.
She received the Padma Shri from the Government of India for her contribution to Trade and Industry.
She holds an MBA from Harvard Business School.

FICCI's Banking & Finance Journal 13


ARTICLES

Mapping infrastructure
investments for 9%
structural growth
Mr. Anup Bagchi
Executive Director, ICICI Securities Ltd

I ndia indeed in the last 4-5 years


has grown at a robust pace and
still has the potential to grow at a
rapid pace atleast for the next
decade. It stood 49th in the Global
ingredient for robust and sustainable
level of GDP growth. This also should
be supplemented with a better
accessibility to low cost finance from
institutions coupled with a better
into the infrastructure and increased
participation by private sector holds
the key.

As per the planning commission


estimates, the government needs
competitive survey for 2009-10, up regulatory framework. These factors
over $500bn of investments over the
by one position from the previous would lead to creation of efficiency
11th five year plan for infrastructure
years standings compared to its peer driven factors, such as better goods
development, 31.4% of the
countries like Brazil and China which and labour market efficiency,
investment outlay will be met by
have gained 16 ranks and 5 ranks financial market sophistication and
budgetary resources of the
over a span of two years. India still business innovation which can shift
government. The rest will be divided
needs to cover a lot of ground before economy's growth to a higher orbit
in a between debt and equity in
becoming highly competitive market in the long run.
2.3:1 proportion respectively.
even though GDP growth has been
Infrastructure development,
robust in the past.
promoted by both the public and
There are various variables the private sector, will be the key for
presence of which makes a particular India to move on to a structural 9%
economy/market globally GDP growth. The pace of growth in
competitive. The growth in India is the last 4-5 years has been mainly
mainly happening from factor driven attributed to the increase in
variables like evolution of financial Investment to GDP ratio from 25% to
institutions, increased priority on 35%-37%, helped by a rise in private
infrastructure and enhancing social sector savings (8%-9%). So to
infrastructure. We believe the most maintain a high investment to GDP
important variable is the presence of ratio (say a consistent ratio of over
infrastructure which is a key 35%) one needs huge flow of capital

14 FICCI's Banking & Finance Journal


ARTICLES

Total Outlay on Infrastructure investments in the 11th Plan (2008-2012)

(Rs crores) Budgetary Proportion Internal Proportion Borrowings Proportion Total Proportion
Resources generation

Centre 200000 31% 169687 40% 395936 40% 765623 37%

States 444671 69% 67880 16% 158386 16% 670937 33%

Private Sector - 185877 433713 44% 619590 30%

Total 644671 423444 988035 2056150


Source: Planning Commission

Composition of Budget Resources, Equity and Debt in total investment plan ( Rs crore)
Budgetary Resources ( Central+ State) 644671 31.4%
Internal Generation/Equity 423444 20.6%
Borrowings 988035 48.1%
Total Requirement 2056150

Source: Planning Commission

The equity portion i.e. is the risk capital formation which is estimated commitments within 3 years of the
capital will be mainly contributed by at $147bn. So the private sectors eleventh plan period. However,
the government which stands at 56% contribution in the total infra overall infra achievement may not
and remaining 44% will be investment is expected to reach to happen as planned as we are already
contributed by the private sector. This 30% by FY12 from the current 17%- seeing slippages in investments as
means that private sector going 18%. In terms of targets the private has been the case in power which
ahead will be one of the prominent sector investments have already forms 1/3 of the infra spend.
sources of risk capital for incremental reached 61% of their targeted

Break up of Private Investment (Infrastructure) ( Rs Crore) Proportion


Internal accruals/equity 185877 30%
Borrowings 433713 70%
Total 619590
Source: Planning Commission

Equity Requirement ( Rs Crore) Proportion


Government sector 237567 56%
Private sector 185877 44%
Total Equity 423444
Source: Planning Commission

FICCI's Banking & Finance Journal 15


ARTICLES

One area where government can regulatory framework should be


work upon is facilitation on the more infrastructure inductive (More
regulatory aspects so that private focus on PPP, promotion and
sector is able to channelize the risk encouragement to BOOT & BOT type
capital required for funding this of projects, Increase in viability gap
requirement. An important source of funding (VGF) should be encouraged
risk capital is foreign flows (FDI+FII), for sustainable private sector and
which though a bit volatile, can help foreign sector participation) so as to
accentuate the supply of risk capital increase the share of infrastructure
given policy reforms keep happening segment in total FDI flows.
on the ground. For instance FDI can
On the other hand India does attract
bring in huge amount of equity
good amount of portfolio flows
capital provided the government
specifically in the stock markets.
raises.
Going ahead one can expect $20bn-
FDI inflow as % to GDP in FY10 stood $25bn of portfolio flows p.a. for next
at 3%, which is a miniscule figure, but few years, which can help Indian
if the policy reforms are eased then corporate to source risk capital for
FDI inflow can increase significantly. capex programmes. But FII flows
Though the FDI inflows were to the being volatile, domestic savings of risk capital for fuelling growth.
tune of $35bn for FY10 (FIPB route+ (mainly household savings) should be This can be either achieved by
other capital+ internal accruals), encouraged in the stock markets as a attracting this money via the direct
inflow towards the infrastructure cushion against the volatile portfolio route or equity mutual funds or via
segments like construction and flows. Though this will be a gradual the insurance companies which are
power just comprised 10% of the process but at the same time can be fairly large source of capital, second
total FDI inflows. So policy and a significant and a sustainable source only to FII flows.

Other sources of capital Volatility of flows Comment

FDI Medium Flow depends on regulations and policy framework


lead to smooth and efficient functioning of the
business/industry

FII High Require more long only funds which commit capital
for long period of time

MF and Insurance Low High household savings can be encouraged given


right products coupled with better risk return
profile are offered.

On the debt side the main source of financing for 11th plan infrastructure investments will happen via bank credit
(51.3%) followed by funding from specialised NBFC's (23%) and ECB's (12.4%).

16 FICCI's Banking & Finance Journal


ARTICLES

Funding of debt component (Rs crore) Proportion


Bank Credit 423691 42.9%
NBFC 224171 22.7%
Pension 55414 5.6%
ECB 122263 12.4%
Unallocable GAP 162496 16.4%
Estimated Debt Requirement 988035
Source: Planning Commission

The stock markets/equity funding L&T, TATA's and few NBFC's have should intensify. Therefore the
alone cannot make the capital been tapping these markets with question is not the quantum but the
markets of any country globally attractive rates of return) to develop ability to drive liquidity through
competitive as stocks markets cannot this market but how soon it becomes proper market platform. There is
suffice the financial needs for a reality is a key question so that definitely a need for intermediation,
corporations and the economy. What debt capital is available at the right instruments and markets that can
Indian market is lacking is a vibrant time, at the right cost and without perform that can function according
debt market particularly in the creating a demand supply mismatch. to the risk, maturity and duration to
corporate segment. Though there are suit the needs of investors so as to
Though India is moving in the right
intentions and signs of some activity optimally utilise the funds available
direction we believe the pace of
happening in this (Corporates like at disposal.
reforms and infrastructure building

About the Author


Anup Bagchi is Executive Director at ICICI Securities Ltd. During his tenure of 15 years with ICICI Bank,
Mr. Bagchi has held many key positions in field of Retail Banking, Corporate Banking and Treasury.Mr. Bagchi
was recently honoured with The Asian Banker Promising Young Banker Award. Business Today has named
Mr.Anup Bagchi as one of India's Hottest Young Executives
Mr. Anup Bagchi
Executive Director Mr. Bagchi holds a Management degree in Finance from IIM, Bangalore and also an engineering degree
ICICI Securities Ltd from IIT Kanpur.

FICCI's Banking & Finance Journal 17


ARTICLES

1 crore to 5 crore
investors: Opportunities
and Challenges
Mr. Praveen D G
Asst. Vice President, Research & Product Development, MCX-SX

C apital markets in India are


maturing, and undergoing a
growth phase but the
potential is much bigger almost
similar to that of the telecom boom
The challenges in the capital markets
arena have underlined the need for
heralding third generation financial
sector reforms. One of the daunting
challenges that need to be met by
face constraints in tapping it. Around
58% of the household financial
savings (gross) in India were diverted
towards the banking system in 2008-
09.
in the current decade. The rapid pace the Indian capital markets is
While corporates see markets to
of innovation in the financial services expanding the investor base and
raise low cost risk capital, investors
spectrum has created immense provides them access to high quality
see liquid secondary markets for exit
investment avenues for the investors. financial services. Among a
options. The regulated markets have
The initiatives of policy makers only population of one billion, a mere 1%
grown significantly, but the markets
witnessed sustained enthusiasm of the population participates in
need greater depth and liquidity.
displayed by investors and new capital markets, and of that only a
Notwithstanding the growth in
exchanges in the country. Earlier fraction is active. This is dismal even
market cap, the market liquidity and
investors looked to a narrow assets' when compared to conservative
depth have not improved. 90% of
band. The developments and growth economies like China where it is
trading is from top 10 cities and of
of markets has brought significant around 7-10%.
over 6000 listed companies, trading
changes in investors' attitude
India has a robust household savings is largely confined to top 100
towards financial investments and
rate of around 30% of GDP. Post securities. The average daily turnover
services. Recent years have
1990s, the rate has grown over years, in cash market grew to only
witnessed good retail participation in
but still almost 55 percent of savings Rs.17,506 crores from Rs.9321 crores
public offers from companies both
drained into physical assets. A large a decade back (2000-01) when the
domestic and abroad operating
number of corporates and especially benchmark Sensex rose to 17,700 by
beyond conventional sectors. Yet,
SMEs are in need of risk capital but end of Jun '10 from a year end
gaps remain and challenges abound.

18 FICCI's Banking & Finance Journal


ARTICLES

closing of 3604 in the year 2000-01. markets. RBI has identified the connected electronically, they are
The growth in turnover is primarily importance of the role of private regulated, have data base of clients
contributed from cash settled sector role and private-public with KYC and have low operating
derivatives. partnership, and has been cost which makes them highly
considering more banking licenses to suitable for such financial services at
Indian markets are more equity
private sector players to achieve incremental marginal cost.
oriented and 70% of the total
expansion and sophistication.
turnover is in the cash settled equity The mutual fund industry also plays a
Currently 40% of India's population
derivatives segment. Equity and pivotal role in attracting retail
has access to banking through 80,500
equity derivatives in the US account investors to capital markets and has
branches. The RBI aspires to achieve
for just 13% of the market share ample scope to develop in India.
100% financial inclusion. Financial
whereas in India these are around There are around 40 AMCs offering
inclusion speaks about the ease of
86%. The capital market cannot be around 630 schemes giving large
access to various financial services in
said to be developed without active scope for investors with diversified
a cost effective manner to all sections
debt market. Unfortunately, the risk appetite and there are a total
of population. Lead banks have been
development in Indian debt market number of only 44.5 million investor
guided to provide banking services to
has never been impressive. So is the accounts or less than 20 percent
every village that has a population of
growth in bond derivatives market. In households holding mutual funds. In
2000 by March 2011. The central
the US interest rate derivatives contrast, in the United States, as per
bank has directed the banks to
account for 85% of the market share ICI/SIFMA survey, the overall equity
further the Business Correspondent
but they are almost absent in India. and bond ownership rate is around
(BC) model by using the services of
Bank borrowings of the corporate 47 percent of US households (54.5
local facilitators like storekeepers,
sector that stood at 11.3% in 1984 million), and about 43% of the US
retired teachers and army personnel
have on an average rose to 21.5% households owned mutual funds.
to reach the unbanked areas.
during the period 2001-02 to 2007-
Banks' and stock exchanges' role in
08. Similar to banks and insurance
development of mutual funds
companies, mutual funds and stock
Penetration of Financial market is crucial. The branch
brokers should aim to expand their
network of mutual funds is limited to
Services: Innovative branch and agent network for
Integration of Intermediaries furthering the cause of financial
inclusion. Akin to them stock
The penetration of the financial
exchanges which have long been
markets outside 5-10 major cities has
recognized as financial infrastructure
remained very poor. Collaboration
companies have to definitely build a
among market intermediaries like
stronger member network.
banks, exchanges, mutual funds,
Introduction of more fee based
brokers and insurance companies
services, innovative products can
would go a long way in expanding
result into a win-win situation for the
investor base.
economy. Brokers of exchanges can
The banking infrastructure can be provide the much needed low cost
used adequately to grow the financial penetration as they are already

FICCI's Banking & Finance Journal 19


ARTICLES

few cities and exploitation of banking Use of Technology to Multiply have significantly improved and
network is necessary for the Financial Services widened. A similar success is
penetration of mutual funds in rural necessary for the wholesome
Technology has demonstrated its
areas. Recognizing the stock development of capital markets in
potential to make investing and
exchanges' role, SEBI has allowed India.
trading activities easier, swifter, safer
online trading of open-ended mutual and cost efficient. With over 600 Need for a wider customer base
funds on stock exchanges, which are mobile subscribers, mobile based prompts introduction of new
connected with 200,000 broker trading has potential to stir a new products and services, technology
terminals spread across 1500 towns. trading revolution in the country. The advancements at competitive prices.
It is a welcome step that SEBI has introduction of internet trading has These benefits can accrue only if
relaxed its regulatory norms and has brought many changes in the trading competition is fostered. Competition
also eased KYC norms to attract more patterns of investors, and has added is encouraged in all quarters in
number of retail investors towards a large number of investors into the developed countries like United
mutual funds. Similar supportive and system. However, the penetration is States. The service providers need to
consistent policy environment would yet to see the potential. India has 70- be bolstered while focusing on
boost the MF industry. 80 million internet users while expanding reach. Contrasting to two
internet penetration rate stands at national level electronic stock
Financial market integration is 7% for a billion population as against exchanges in India, there are 11 SEC
absolutely necessary for penetration. 25% in China and Singapore, and 75%
registered national securities
The services of insurance agents (~ 3 in United States. This is alarming but
exchanges, 2 unregistered exchanges
million), stock brokers and banking it highlights opportunities to tap the and more importantly around 73
business correspondents may be untapped potential of internet active Alternative Trading systems
extended and be used to cross sell trading. The planned issuance of (which act as deemed exchanges) in
products and contribute to greater biometric based Unique United States. There are around
financial inclusion through Identification (Aadhar) cards will thousands of national commercial
integration. provide access to the hitherto banks in United States as against
underprivileged. hundreds in India.

Competition among The role of capital markets is vital for


Financial Service Providers inclusive growth in wealth
distribution and making capital
Competition has become new available for corporate across the
mantra in sectors like telecom, country. Capital markets in an
banking and airlines that helped emerging economy can create
customers with a wide product range greater financial inclusion by
and better service, all at competitive introducing new products and
rates. Today India has one of the services tailored to suit investors'
largest mobile user base. Airline preference for risk and return as well
sector is no more catering only to as borrowers' project needs and risks
specific classes. Banking services appetite. Innovation, credit

20 FICCI's Banking & Finance Journal


ARTICLES

counseling, financial education and resources can be used by the


proper segment identification intermediaries to adopt low cost
constitute the possible strategies to business models. The institutions
achieve this. A well developed capital may include the criteria regarding
market creates a sustainable national financial literacy and financial
level low cost distribution mechanism inclusion in the performance
for distributing multiple products and evaluation of their field staff.
services across the country. Financial education may be made a
part of curriculum for bringing
The growth and development of small
awareness among young generation.
and medium enterprises play a vital
role in greater financial inclusion. Capital Raising - Essentiality
SMEs contribute greatly to our
of Developing the Corporate
foreign trade and to employment on
Bond Market
a large scale. The much awaited SME
stock exchanges should be given due Bond market comprises of
rationalizing the taxation regime. A
consideration given the potential they government and corporate bonds.
liquid secondary market is necessary
have in assisting the entities in raising Indian bond market is dominated by
for development of primary market
capital and reducing their excessive the government securities. Only
as investors get easy exit route.
dependence on bank lending. These 4.14% of the total bond market
However, we do not have an active
companies have the potential of comprises of corporate bonds as
secondary market too. The exchange
driving investors from local area compared to between 40 to 50% in
market is not active and the market
where the companies are located the above markets. An active
is largely OTC. The introduction of
towards the capital market. corporate bond market is essential
mandatory reporting of trades in
for India Inc. The corporate bond
Financial Services: Role of corporate bonds is a welcome step
market is still at the nascent stage.
Financial Education as that gives direction to the market
The market capitalization of
and improves market efficiency. The
outstanding corporate bonds in India
One of the greatest challenges in SEBI data for corporate bonds during
as a percentage of GDP stands only at
expanding India's investor base lies in March 2010 shows an average daily
around 2.5% against 43%, 34%, 35%
fostering financial education among reported turnover of less than
and 19% in Malaysia, Singapore,
masses. Lack of financial education is Rs.3,300 crore.
Hong Kong and Japan respectively.
a major reason behind people's
The market cap of Indian equity The rating companies and valuation
preferences to low-earning fixed
market is around 110% of country's entities need to be strengthened to
deposits.
GDP. foster confidence among retail
Education institutions, financial investors. A retail investor, who is not
The challenges involved in
intermediaries and local very confident of monitoring the
developing the bond market in India
correspondents should all work equity market behavior, prefers
include generating demand from
together to heighten financial literacy bonds which are relatively safer.
domestic investors along with
among people. Business networks, Interest rates are easily understood
boosting market infrastructure and
technological aids and other as they are dominantly used in the

FICCI's Banking & Finance Journal 21


ARTICLES

form of fixed deposit. It is felt that Conclusion the country and drive 100% financial
guarantee mechanisms including inclusion. Intermediaries need to
bank credit default swaps can help The robust savings figures of the attract the new customers along with
investors to participate in issuances country reflect the potential to retaining the existing chunk.
by mid-tier corporate. However, expand the customer base from a Expansion of the customer base
credit default swaps are nearly crore to five crores given the savings implies that intermediaries strictly
missing from Indian market. Recent are channelized in the right direction. adhere to the dictate-"Customer is
indications from the RBI suggest that Consistent efforts by the government the king". This demands keeping
introduction of CDSs is being and regulators to foster an abreast of technology and
considered seriously. Besides, it is a investment climate that is conducive consistently innovating to bring out a
welcome step that repos have been and by the financial intermediaries to diverse range of products to suit the
introduced in the corporate bond go beyond the customary can herald customer needs.
market. a financial services revolution across

About the Author


Praveen DG is an Asst. Vice President in the Research & Product Development Department at the MCX Stock Exchange (MCX-
SX). During his over a decade of career with financial expertise in capital, commodity and currency market products, he has
extensively studied several global exchanges and global markets' practices and products, and has been involved in designing
financial products. He is an active member of the core team of research and product development of the exchange and
undertook various empirical studies in the areas of risk management and financial products. Prior to this he was with Multi
Mr. Praveen DG Commodity Exchange of India (MCX) where he contributed to the product research and development.
Asst. Vice President
He was earlier associated with the Institute of Chartered Financial Analysts of India (ICFAI) Group and worked at various
(MCX-SX)
capacities and was involved in various consulting projects. He has several articles published in acclaimed business journals,
magazines and newspapers.
He is a Chartered Financial Analyst (CFA) and holds Masters degree in Economics. He is also a holder of Master of Business
Management (MBA) from the Osmania University.

Disclaimer
The views expressed in this article are personal and do not reflect in whatsoever manner, those of MCX - SX

22 FICCI's Banking & Finance Journal


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Indian Financial
Markets-2020
Mr. Sunil Godhwani
MD & Chairman, Religare Enterprises Ltd.

D emographic dividend
combined with a burgeoning
middle class already bigger
than the US population provides a
platform for India to become one of
trajectory will require a balanced
approach between mobilizing the
near dormant household savings
residing as deposits towards
productive investments and
structural changes in the industry
that are likely to craft the contours of
the Indian financial system.

Changing Landscape of the


the largest economies by 2020. One providing stable platforms for global Indian Financial Markets-
of the key segments that will drive capital inflows. 2020
this growth will be financial services
Experience across world-wide Over the last decade, growth in the
sector that will help productively
confirms that the countries with well emerging markets have surpassed
channelize domestic savings and
developed and market oriented that in the advanced economies
induce capital flows from developed
financial systems have grown faster leading to a significant increase in
markets back to the increasing
and more steadily than those with the global capital flows (comprising
important Indian market.
weaker and closely regulated of FDI, Cross border equity & debt
Financial Services sector contributed systems. While global linkages have investments & lending). As per the
~15% to India's GDP in FY09, and is in recent times stressed many McKinsey MGI study, global capital
the second-largest component after financial markets, for India their flows have grown three fold from
trade, hotels, transport and impact can be limited by mobilizing $3.8 trillion in 2001 to $ 10.5 trillion
communication all combined domestic savings and introduction of in 2007 (At the onset of the
together. The Indian financial sector pro stability led reforms. economic crisis, global capital flows
has gone through significant reforms dropped by ~82% in 2008 at $1.9
Also, while Indian regulators such as
over the past two decades post the trillion, because of the drop in cross-
RBI have played a judicious role in
recommendations of various border lending). However in terms of
ensuring a well regulated financial
Committees, which have facilitated relative contribution, India captured
services sector so as to minimize the
operational flexibility and functional less than 1% ($79 billion) of the
aftermath of the recent global crisis,
autonomy. Going forward this growth global capital flows in 2007 & ~3%
the time is opportune for some

FICCI's Banking & Finance Journal 23


ARTICLES

penetration index. One of the key total household savings were


reasons for lower penetration is low invested in shares, debentures &
urbanization rate in India at ~30% in mutual funds in FY09 (Only ~3% of
2008. As per the McKinsey MGI the household savings were invested
report on “India's Urban in shares, debentures & mutual
Awakening”- Over the next 20 years, funds in FY10 with the onset of the
urban India will create 70% of all new crisis). This is still much lower when
jobs in India and will create demand compared with any developed or
for financial products. We will emerging market. With growing
witness an urban transformation the investor awareness & confidence
($51 billion) in 2008. As the crisis scale and speed of which has not levels, higher risk appetite to garner
ebbs, capital flows into emerging happened anywhere in the world better returns and increasing
market economies have resumed as except China. In terms of both contribution of the Tier II & III cities,
a consequence of a global system population and GDP, many Indian retail investments are likely to see
awash with liquidity, the spectre of cities will become larger than many multi-fold increase over the coming
low interest rates ruling in advanced countries today (Mumbai decade. This will bring in the much
economies and the prospects of Metropolitan Region's GDP is desired stability and autonomy in the
robust growth in emerging market projected to reach $265 billion by Indian capital market which is still
economies. With strong underlying 2030, larger than the GDP of many highly vulnerable due to the changes
fundamentals & stable macro- countries today, including Portugal, in the FII flows.
economic outlook, India is Colombia and Portugal). Indian DIIs
Also, lack of a developed bond
distinctively positioned to capture are well positioned to leverage these
market has restricted investors to
more than 5% of the global capital opportunities with time to come as
bank deposits with standard
flows by 2020. they move towards the next
maturities and very low returns
generation of transformation through
The banking system is, by far, the compared to any other investment
industry consolidation, innovative
most dominant segment of the asset class. India's size of the bond
distribution, enhanced product
Indian financial sector. Domestic market as a % of GDP is close to
offering, coupled with regulatory
Institutional Investors like Insurance, ~40% only. The Indian bond market is
reforms, we are certain to see some
Asset Management Cos & Private of them featuring among the Global
Equity have grown at an average of league tables by 2020.
25-30% p.a. over the past decade
due to the ongoing financial reforms Till two decades back, significant part
and increasing participation from the of the household savings were
retail & HNI investor. At less than invested in physical assets (gold etc)
11% (AuM to GDP) in Asset or put into bank deposits and other
Management as on March'10 and 4% saving schemes of the Government.
(Premium collected to GDP) in Life- However since the late eighties,
Insurance by end of 2008, Indian DIIs equity & debt capital markets have
continues to be low on the global started gaining some importance for
the retail investors as 12% of the

24 FICCI's Banking & Finance Journal


ARTICLES

composed of government bonds & branches even though 39.7% of the tool in providing access to banking
corporate bonds. However, the overall branch network of Indian products in remote areas at the
market is still overwhelmingly banks (31,727 branches) is in rural lowest transaction cost. ATMs cash
dominated by government bonds, India. Further nearly 80% of the dispensing machines can be modified
which account for almost 92% of the Indian population is without life, suitably to make them user friendly
market and form liquid component of health & non-life insurance coverage. for people who are illiterate, less
the bond market. The share of While life insurance penetration is educated or do not know English.
corporate bonds in GDP is merely 4%, non-life cover is even lower at
In this era of globalization, Indian
3.3%, compared to 10.6% in China, 0.6%. The per capita spend on life
banks are going to serve their
41.7% in Japan & 49.3% in Korea. and non-life insurance is just about
domestic, corporate & NRI clients in
With the expected regulatory reforms Rs 2,000 and Rs 300 respectively,
the international markets with
and setting up of a bond exchange in compared with global average at
increasing competitive pressures
India, we are likely to see a much least Rs 18,000 and Rs 13,000.
from their international peers. Indian
vibrant and developed bond market
Financial Inclusion is going to be a public sector banks will continue to
in India with strong participation from
necessary enabler towards equitable strengthen and be the dominant
both the retail & Institutional
growth. It will allow rural & semi players with the likelihood of further
segment.
rural sector to build savings, make consolidation. Indian banks will gain
Another important theme for 2020 investments & provide access to further prominence in the
will be focus towards financial credit. However addressing financial international arena as some of the
inclusion. Financial inclusion has long inclusion will require holistic leading public & private sector banks
been a challenge in India, where bank approach on the part of banks in will, like some Chinese banks,
transactions are mainly urban based creating awareness about financial emerge as global leaders. Foreign
and people living in rural areas rarely products, education, offering banks will become more niche
even have a bank account. Only 5.2% counseling on savings and credit. players and will increasingly focus
of India's 650,000 villages have bank Brick and mortar expansion of the more on the cross border products
banking system is going to find it like equity raising, debt raising, M&A,
difficult to reach large sections of the transaction banking support.
population purely for commercial
Technology will play a critical role in
reasons. Branchless banking as a
increasing penetration for a variety
concept will emerge very strongly
of financial services and products
and will over-take conventional bank
and will be the mainstay in
branches by either using information
facilitating the next wave of financial
& communication technology
services growth in this country. This
services or by forging linkages with
will largely be driven by improved
third party organizations like MFIs
accessibility and reduced costs.
(Micro-Financial Institutions) &
Considering India's mobile & internet
Business Correspondents.
penetration (active internet users)
Technology will drive innovation and
has grown significantly with already
especially mobile-banking
~617 million & ~60 million
technology can be a very valuable
subscribers respectively as on

FICCI's Banking & Finance Journal 25


ARTICLES

June'2010, integrating mobile towards harmonization. On the studies, Indian GDP is expected to
telephony, into customer targeting domestic front, greater integration grow multifold. India finds itself at
will become extremely critical over among domestic regulators will be the centre stage of global interest
the time to come. Further, we are the natural course towards improved and growth. The financial sector as
likely to see increasing interaction via accessibility and investor confidence. part of this growth story finds itself
mobile based applications, as mobile at a critical juncture in India. The
Another important enabler that is
payments (e.g. e-money) will reduce various initiatives taken by the
likely to emerge will be an Indian
check transactions. Transaction costs Government to meet the challenges
Sovereign wealth fund. Even though
will see a significant drop as of a complex financial architecture
this has been a subject of discussion
technology plays an important role to have ensured that a new face of the
over the last couple of years, setting
reach customers cost-effectively. Indian financial sector is crystallizing
up a Sovereign Wealth Fund for India
into a strong, transparent and
We have already established a fairly could be an important channel to
resilient system. And even though a
robust regulatory system in place invest both in the local market to
sound and resilient banking system
through the various reforms over the bring financial stability and
and well –functioning financial
past two decades. In the wake of the confidence coupled with acquisition
markets have helped Indian economy
recent crisis, Indian financial system of critical global assets in sectors that
to rebound buoyantly and remain
has shown great resilience partly due are of significance for the Indian
largely resistant from the
to the prudent regulatory framework economy such as energy,
communicable effect of the global
and proactive response by the communication, defense and
meltdown, India cannot afford to be
regulators. Prudency and customer healthcare. Most developed &
complacent. Over the next decade,
protection will continue to be the emerging economies even in Asia
Indian financial services sector,
core agenda for the regulators. such as China, Singapore, and
supported by sound regulatory
However, the Indian regulators will Malaysia etc have established SWFs
decisions, promises to offer immense
need greater alignment with the from their current account surpluses
growth opportunities and will serve
foreign regulations, as increased and are actively expanding their
as key enabler towards reorienting
globalization introduces common national interests via this platform.
both domestic and global capital
vulnerabilities and increasing
The fundamentals of the Indian flows into Indian financial markets.
demands from foreign nations
growth story remain unchanged and Financial services 2020 will see the
by 2020 as suggested by many emergence and embedding of the

About the Author


Mr. Sunil Godhwani is the driving force behind Religare Enterprises Limited (REL). He oversees the service brands of the
promoters which include Religare Enterprises (integrated financial services) along with Religare Technova (IT), Religare
Wellness (formerly Fortis Healthworld), Super Religare Laboratories (formerly SRL Ranbaxy; Path Labs) and Religare Voyages
(private air charter and travels business).
Mr. Sunil Godhwani Mr. Godhwani has given strategic direction to Religare's growth since his joining in 2001. He has been instrumental in
MD & Chairman establishing Religare's vast network and shaping the Company's strategies in India and abroad. Mr. Godhwani brings to the
Religare Enterprises Limited company strong leadership skills, vigor and a passion for excellence. He believes in nurturing a culture that is entrepreneurial,
result oriented, customer focused and based on teamwork. He has a diverse and wide-ranging experience of over two
decades in managing large scale businesses.

26 FICCI's Banking & Finance Journal


INDIAN ECONOMY

Indian Economy –
an update

I ndia's strong macroeconomic


performance during the fiscal
year 2009-10 is an indication of
the economy's swift recovery from
the global financial and economic
As pointed out by the recently
released reports such as The
Macroeconomic and Monetary
Developments, PM'S Economic
Advisory Council Report as well as
festive season, the domestic demand
in the economy will only be on an
uptrend.

While India is returning to its pre-


crisis growth trajectory, an issue of
crisis. The resilience of our economy the Annual report of RBI, the positive
concern looming over the economy
is thoroughly reflected in the high growth momentum of the economy
is the high and generalized inflation.
economic growth rate of 7.4 percent has been mainly driven by the
We have been facing a situation of
registered during 2009-10, which was buoyant performance of the
rising prices for a long period now.
one of the highest in the world. The industrial sector and the rising
While initially inflation was confined
growth outlook for the year 2010-11 investment and consumption
only to food articles due to a
is also robust with the country's demand. Consumer confidence is on
deficient monsoon season in 2009-
central bank, RBI, projecting a growth the rise, as suggested by strong
10, it has gradually manifested itself
of 8.5 percent with an upward bias. corporate sales figures, higher auto
in the prices of manufactured goods
Corroborating the bright economic sales and augmented consumer
and the fuel group. To contain
prospects for the Indian economy, durables production. Even the
various international agencies have corporate sector is recording strong
also consistently perked up their profitability and higher capacity
growth outlook. In the latest World utilization levels. Companies are
Economic Outlook, the International exuding optimism and confidence
Monetary Fund (IMF) forecasts India's about the future and are bringing out
GDP to clock a growth of 9.5 percent projects that were put on hold about
in 2010. Asian Development Bank a year ago due to difficult economic
(ADB) too has mentioned that they conditions. They are also looking at
will revise India's growth forecast in new proposals and diversifying into
their September-end review. new areas. With the upcoming

FICCI's Banking & Finance Journal 27


INDIAN ECONOMY

inflation and anchor inflationary Greece, the Union Budget for 2010-
expectations, the Reserve Bank of 11 the government announced a
India (RBI) initiated the process of medium-term fiscal consolidation
calibrated exit from the plan. The 3G/BWA auction proceeds
accommodative monetary policy leading to unexpected gains of
stance much before other countries almost Rs. 1 lakh crores for the
of the world. With a near normal exchequer along with the
monsoon this year and an upcoming deregulation of petrol prices and
good harvest it is expected that the upward revision in prices of other
inflationary pressures will ease off petroleum products as well as robust
gradually. The downward trend in indirect tax collections are expected
inflation has already begun and most to somewhat ease off the stress on
estimates including those by RBI the government's fiscal situation.
project inflation to reach the level of However because of the additional the expected global economic
6 percent by March 2011. expenditure of Rs. 55,000 crore as outlook much worse than what it
reflected in Supplementary Demand was a couple of months back a
In response to the crisis and to
for Grants, the above developments durable global aggregate demand to
support the ailing economy, the
may not contribute much towards a sustain our growing exports seems
government and RBI deviated from
faster fiscal correction. uncertain. Recognizing the pressure
their fiscal consolidation path and
on export's sector due to adverse
undertook huge expenditures which It can be said that the global trade
global developments, the Commerce
were not planned and which resulted has contracted much sharply than
Minister Mr. Anand Sharma has once
in a high fiscal deficit for the global GDP during the crisis period.
again announced additional sops
economy. In view of the adverse Even in India's case the turnaround in
worth over Rs. 1050 crore for the
impacts of the high fiscal deficit export and import growth came
exporters in the recent Annual
which were particularly emphasized about only after a contraction for 13
review of the Foreign Trade Policy.
through the sovereign debt crisis in and 11 months respectively.
Despite considerable uncertainty
According to the latest figures, India
about the pace and shape of global
exports grew at a moderate rate of
recovery, the government is
13.2 percent in July 2010 while the
optimistic of achieving its annual
imports grew at 34.3 percent. The
export target of USD 200 billion by
lower growth rate of exports in
March 2011.
comparison to the 30-35 percent
export growth experienced during In the beginning of fiscal year 2010-
the last couple of months partly 11, capital flows to India had
reflects the base effect setting in. So moderated somewhat in response to
far in 2010-11, import growth has the sovereign risk concerns in the
largely exceeded the export growth, Euro zone. But given the strong
reflecting stronger growth growth outlook of the Indian
performance of India and its economy the capital flows have
sustained domestic demand. With revived and are expected to ascend

28 FICCI's Banking & Finance Journal


INDIAN ECONOMY

After witnessing considerable through the various developments


volatility against most of the world taking place such as release of
currencies during the year 2009-10, discussion papers on FDI in defense
the Indian rupee has tended to and multi-brand retail, IPR issues as
maintain its value vis-à-vis a dollar well as on the entry of new banks in
between the range Rs. 46/USD to Rs. the private sector, government's
47/USD during the last three notification for all listed companies
months. It is very important for to have a public float of at least 25
countries like India to contain large percent, steps initiated to reform the
exchange rate volatility since it may PDS system, etc. Given the present
lead to unfavorable effects on either state of affairs, it looks that the
exports or inflation. States and Centre would take some
more time to reach a consensus on
While these have been the key
Goods & Services Tax (GST). In view
macroeconomic developments, a lot
from now on. In the first quarter of of this, the deadline of April 1, 2011
has been happening in the
2010-11, we have seen foreign direct for implementation of GST looks a
policy/reform space. Government of
investment inflows into India little too ambitious. However, it is
India is actively engaging itself with
amounting to USD 5.8 billion whereas hoped that reform of the Indian
the stakeholders in bringing about
the foreign institutional investments, taxation system shall begin on the
policy reforms in a various areas. The
which have shown more volatility, same date atleast with the
focus of the government on
have brought in funds worth USD 3.5 implementation of the Direct Tax
economic reforms is clearly reflected
billion. Code (DTC).

FICCI's Banking & Finance Journal 29


POLICY UPDATES

3. To bring out farmers from the "handicap" due to their foreign


Banking sector clutches of money lenders, ownership tag. These banks are
finance minister Pranab on the same footing as other
1. Worried about an inflationary Mukherjee on Tuesday urged nationalised banks as they are
spiral, the Reserve Bank of India public sector banks (PSBs) to incorporated in India.
hiked its key policy rates. The increase their kisan credit cards
7. Standing Conference of Public
apex bank increased the repo (KCC) across the country by 20%
Enterprises (SCOPE) has opposed
rate (the rate at which it lends in 2010-11, both in terms of the
a reported proposal to separate
money to banks) and the reverse number of accounts and the
the role of Chairman and
repo rate (the rate at which it amount disbursed.
Managing Director in listed
withdraws funds from banks) to 4. To address the need for better entities. Any such decision
5.75% and 4.5%, respectively. collaboration and sharing of should not be made in haste and
Additionally, moving in line with information on fraud and high- should be arrived at only after
the global practices and keeping risk activities throughout banking detailed interaction with public
pace with the fast-changing and financial industry, Credit sector enterprises (PSEs), the
changing monetary environment, Information Bureau (India) SCOPE Director-General, Dr U.D.
the Reserve Bank of India has Limited and TransUnion, on Choubey, has said.
decided to undertake mid- Wednesday, announced the
quarter review of the monetary 8. The Reserve Bank of India (RBI)
launch of Cibil Detect - a
policy. has eased the burden of
nationwide database of reported
financing infrastructure projects
2. Top bankers in the country fraudulent and suspect activities.
in the country by allowing
should stop expecting more than 5. The Government has set up a companies to replace domestic
15% hike in their fixed salaries committee to look into rupee loans taken from banks
annually since a new rule on deregulating interest rates on and financial institutions with
compensation to whole time small savings instruments such as external commercial borrowings
directors and chief executives of public provident fund schemes, a under the approval route.
Indian non-government banks is move aimed at linking them to
on its way. RBI came out with 9. In a move to tame price rise, the
market rates. The panel, to be
draft guidelines, proposing to Reserve Bank of India (RBI) on
headed by RBI deputy governor
restrict the fixed component of Tuesday hiked its short-term
Shyamala Gopinath, will review
the annual salary hikes of CEOs the structure of the National
and wholetime directors of Small Savings Fund (NSSF) and
private banks to 10-15%. This is give recommendations on
part of RBI's comprehensive making schemes more flexible
guidelines based on the and market-linked.
compensation policy formulated
by the Financial Stability Board 6. The Department of Industrial
(FSB), a global body for Policy and Promotion (DIPP) said
standardisation of rules for the that the ICICI Bank and HDFC
financial sector. Bank will not suffer from any

30 FICCI's Banking & Finance Journal


POLICY UPDATES

indicative lending rate by 25 basis Gokarn gets the additional


points from 5.5 per cent to 5.75 responsibility of administration,
per cent and borrowing rate by 50 personnel management and
basis points from 4 per cent to human resources development,
4.50 per cent with immediate besides the Deposit Insurance
effect. and Credit Guarantee
Corporation. Usha Thorat gets
10. The Union Cabinet on Friday
the Rural Planning & Credit
approved release of Rs 4,868
Department and Urban Banks
crore as interest subvention to
Department in addition to her
public sector banks (PSBs),
existing seven departments,
Regional Rural Banks (RRBs) and
including housekeeping.
cooperative banks. This interest
subvention will enable farmers to 13. In order to plug loopholes in the
receive short-term crop loans at manner the banks are managing
interest rate of 7 per cent per government securities portfolios,
annum during 2010-11. the Reserve Bank of India (RBI)
has changed the existing norms.
11. After acquiring the RBI's stake in
RBI has now said if the value of
State Bank of India, the
sales and transfers of securities
government plans to pick up the
to/from held to maturity (HTM) banks. The Indian banking
central bank's stake in apex
category exceeds 5% of the book regulator merely flagged off
agriculture bank Nabard and
value of investments held in HTM certain issues and said it will set
housing finance regulator
category at the beginning of the policies after receiving feedback
National Housing Bank (NHB).
year, bank should disclose the from stakeholders by 30
There would be cash outgo of Rs
market value of the investments September. It has not given any
1,900 crore for the acquisition of
held in the HTM category. Also, it time frame for finalizing the
RBI's stake in both these
should indicate the excess of policy, but said all applications
institutions and the government
book value over market value for will be examined by an external
has sought Parliament's approval
which provision is not made. group and "a limited number of
for the purchase.
licences" will be given, based on
14. The Reserve Bank of India (RBI)
12. The Reserve Bank shuffled the the group's recommendations.
released a discussion paper on
portfolios of its four deputy
capital, ownership structure, 15. The Rajya Sabha passed the State
governors -- Usha Thorat,
foreign shareholding norms and Bank of India (Amendment) Bill
Shyamala Gopinath, KC
the business model of new providing for reduction of
Chakrabarty and Subir Gokarn.
private banks, but stayed away government equity to 51 per
Gopinath, besides her existing
from taking any position on the cent from a minimum of 55 per
departments, will look after the
profile of the new entities that cent. The Lok Sabha had already
Department of Payments and
will be given licences to run such passed the Bill.
Settlement Systems too. Subir

FICCI's Banking & Finance Journal 01


POLICY UPDATES

4. A framework for an alternative


Capital Markets means of settlement of
sector derivatives will soon be out said
CB Bhave, chairman of the
1. The Securities and Exchange Securities and Exchange Board of
Board of India (SEBI) has relaxed India (SEBI). Guidelines for
the norms for disclosure of physical settlement of derivatives
securities lent by foreign are expected to be out by the
institutional investors (FIIs) to end of the month, he said.
overseas entities. According to a
circular issued on Tuesday, FIIs 5. The Securities and Exchange
are now required to disclose Board of India (SEBI) on Thursday
information on a weekly basis, allowed the two premier stock
instead of the current practice of exchanges, BSE and NSE, to
ordinance with finance minister
daily disclosures introduce a share-based
Pranab Mukherjee working hard
settlement system, also called
2. The Securities and Exchange to allay Opposition's
physical settlement, for futures
Board of India (SEBI) on Tuesday apprehensions of a "super-
and options trading in stocks.
relaxed reporting norms on short regulator" dwarfing the RBI. The
This has been a long-standing
sales by foreign institutional joint mechanism being set up
demand from the market
investors (FIIs), allowing them to under the bill will have a limited
participants, mainly to put the
make weekly submission on mandate of intervening only
Indian F&O settlement system at
securities lent to entities abroad. when there is an issue of
par with the other developed
The new reporting norms came jurisdiction between two
markets like the US, Europe,
into effect from July 2. regulators. The securities bill
Japan, Hong Kong, etc.
provides for setting up a joint
3. The Securities and Exchange The Securities and Exchange body under chairmanship of the
Board of India (SEBI) on Board of India (SEBI) is reviving finance minister with
Wednesday relaxed the exposure the practice of pre-opening representatives from four
margin requirement for stock session for share trades, and has financial sector regulators. The
derivatives, based on the asked stock exchanges to put bill states the RBI governor will
feedback received from market systems in place for it. To begin be vice-chairman of the joint
participants. SEBI issued a with, the pre-open session will committee.
circular saying that the exposure be introduced on a pilot basis,
margin would be higher of five 7. The market watchdog SEBI came
and will be applicable only for
per cent, or 1.5 times the out with a consultative paper on
shares in the BSE Sensex and NSE
standard deviation of the portfolio management services
Nifty indices.
notional value of the gross open (PMS), suggesting that the
position in single stock futures 6. Lok Sabha passed the Securities portfolio managers be paid the
and gross short open position in and Insurance Laws performance-based fee, only if
stock options in a particular (Amendment) and Validation Bill the client gains from the capital
underlying. 2010 to replace the Ulip markets. The proposal will help

32 FICCI's Banking & Finance Journal


POLICY UPDATES

large investors from limiting their friendly measure as it would counter transactions made by
losses by way of paying a fixed fee allow investors earn interest on them in commercial papers (CP)
to their portfolio managers. NFO investments till its deployed and deposit certificates (CD)
by its fund managers. from August 16 to make these
8. To bring greater transparency in
transactions more transparent.
the fee structure and improve 10. The Securities and Exchanges
turn-around time for customer Board of India (SEBI) has allowed 13. In a move to usher in more
service processes, market exchanges to introduce currency transparency in disclosure of
regulator SEBI has amended four options on US dollar pairing with shareholding pattern by
mutual fund regulations and rupee, providing another companies, the Securities and
omitted one schedule. These alternative to corporates for Exchange Board of India (SEBI)
regulations pertain to offer hedging against currency has asked companies that have
period, allotment of units, refund fluctuations. In another move, it issued depository receipts to
of excess subscription, account also asked stock brokers, FIIs, classify them as either promoter/
statements and management fees asset management companies to promoter group and non-
chargeable by the asset report all over-the-counter promoter in their quarterly
management companies. The transactions made by them in disclosures to stock exchanges.
offer period for ELSS (earnings commercial papers (CP) and The SEBI board has also decided
linked savings scheme) have been deposit certificates (CD) from
brought down by 30 days. These August 16 to make these
will now be open for more than transactions more transparent.
15 days instead of 45. Fund
11. The market watchdog SEBI
houses are now expected to
shortened the period within
refund excess subscription money
which mutual fund schemes can
within five working days instead
be subscribed and refunds can be
six weeks. A failure to do so
claimed, a move that will
would start attracting penal
safeguard investors from market
interest at 15 per cent per annum
volatility. The Securities and
on the expiry of five working
Exchanges Board has slashed the
days.
calendar for availing of mutual
9. SEBI extended the deadline for fund schemes and seeking
mutual funds to implement the refunds, from 87 days to just 20
ASBA facility for new fund offers days now.
(NFO) to October 1. Earlier in
March, SEBI had kept the
deadline of July 1. ASBA is 12. Market regulator the Securities
currently in place for IPO and Exchanges Board of India
subscribers in the equity market. (SEBI) today asked stock brokers,
ASBA facility is an investor FIIs, asset management
companies to report all over-the-

FICCI's Banking & Finance Journal 33


POLICY UPDATES

2. The government notified one


Insurance sector more avenue for saving tax -
investment in infrastructure
bonds. The exemption in these
1. The government has increased
long-term infrastructure bonds,
the existing limit of the
under a new Section 80CCF of
Employees Deposit Linked
the Income Tax Act, 1961, would
Insurance (EDLI) amount from Rs
be in addition to the deduction
60,000 to Rs 1 lakh. The amount
of Rs 1 lakh allowed under
will be paid to the next of kin of
Sections 80C, 80CCC and 80CCD
to make it mandatory for an employee in case of his death.
of the Act.
companies to disclose within 10 In a notification issued on June
days a change exceeding 2 per 18, the government in the newly 3. The Insurance Regulatory and
cent of the paid-up share capital modifed Employees' Deposit Development Authority (IRDA)
of the company, after a Linked Insurance (Amendment) has issued a diktat barring
corporate event. Scheme, 2010, said the benefits lenders from distributing policies
will be for employees of both the under referral arrangements.
14. The Securities and Exchange public and private sector.
Board of India (SEBI) has directed 4. IRDA has directed insurers to
mutual (MF) fund houses to constantly inform the policy
provide investors an exit option holders at all times, the nearest
before increasing the possible alternative hospitals,
administrative fees in a fund-of- where the cashless facility is
fund (FoF) scheme. FoF schemes available and the conditions
are those where a mutual fund thereof. The regulator has also
invests in a scheme of another directed insurers not to
MF. discontinue cashless facilities
even if certain hospitals are
15. Public Sector Undertakings removed from the PPN list in
(PSUs), heaved a sigh of relief as case policy holders have pre-
the government exempted the authorisation to get treatment
listed state-run firms from the from these medical centres. This
mandatory condition of 25 per is the first direction from IRDA to
cent public holding. Now the insurers after four PSU general
PSUs would have to reach a level insurance companies with effect
of 10 per cent public holding in from July 1 suspended cashless
three years for remaining listed medical facilities at certain super
in stock exchanges, a notification specialty medical centres on
issued by the Finance Ministry grounds of overbilling.
said here.

34 FICCI's Banking & Finance Journal


SURVEYS

FICCI Economic Outlook


Survey July 2010
F ICCI's Economic Outlook
Survey is a quarterly survey
conducted amongst leading
economists of the country with a view
to gauge their perception and views
11 as well as for Quarter 1 (Apr-June) l
and Quarter 2 (July- Sep) of 2010-11.

In addition to these, FICCI sought the


views of economists on some topical
Fiscal Deficit - 5.1 percent of GDP

IIP - 10.6 percent


l

WPI inflation rate (End March


l
2011) - 6.5 percent
issues like expected monetary policy
on topical economic issues as well as Money Supply (M3) growth - 17.0
l
action by RBI in the forthcoming
seeks their outlook for key macro- percent
monetary policy review; downside
economic variables. The economists
risks to growth during fiscal 2010-11; Trade Balance -
l (-) 8.2 percent
who take part in this survey largely
outlook for inflation of primary
come from the banking and financial USD / INR exchange rate (End
l
articles and manufactured products.
sector. The sample however also March 2011) - Rs. 44.5/USD
includes economists from industry The feedback received from the
Bank credit growth - 20.0 percent
l
and research institutions. participating economists was
aggregated and analyzed. The results Quarterly Forecasts for Q1
The first survey report was released in
obtained are presented in the (Apr- June) and Q2 (July- Sep)
January 2010 and the second report
following pages. of 2010-11
was released in April 2010. This is the
third report of the Economic Outlook The findings of the survey represents GDP growth - 8.7 percent (Q1,
l
Survey. The survey was conducted the views of the leading economists 2010-11) and 8.5 percent (Q2,
during the period June 24, 2010 and and do not reflect the views of 2010-11)
July 15, 2010. As part of the survey, a FICCI.?
structured questionnaire was drawn Agriculture and allied activities
l

up and sent to key economists for Annual Forecasts for 2010-11 growth - 2.6 percent (Q1, 2010-
their inputs and views. This time 14 11) and 4.0 percent (Q2, 2010-11)
l GDP growth - 8.5 percent
economists of repute participated in Industry growth - 11.0 percent
l
the survey. l Agriculture and allied activities
(Q1, 2010-11) and 10.0 percent
growth - 3.5 percent
The economists were asked to (Q2, 2010-11)
provide their forecast for key macro l Industry growth - 10.0 percent
Services growth - 9.2
l percent (Q1,
economic variables for the year 2010- l Services growth - 9.0 percent

FICCI's Banking & Finance Journal 35


SURVEYS

2010-11) and 9.1 percent (Q2, economists believe that while the overall agricultural
2010-11) recent IIP numbers may have performance may not be 'too
shown a decline from 16.5 percent strong' as overall soil
IIP - 13.1 percent (Q1, 2010-11)
l
in April 2010 to 11.5 percent in productivity is now on the
and 11.0 percent (Q2, 2010-11)
May 2010, such a growth is still lower side. Further, if less
WPI inflation rate - 10.0 percent
l reasonable and may not dissuade rainfall can impact
(Q2, 2010-11) RBI from restricting monetary agricultural output, excessive
policy action. rains and subsequent floods
Money Supply (M3) growth - 15.8
l
too will be a negative
percent (Q2, 2010-11) Though the above is the majority
development. Some of the
view, a few respondents opined
Trade Balance - (-) 8.0 percent (Q2,
l northern states are already
that given the moderation in IIP
2010-11) seeing floods and this will
growth and the expected
have a bearing on agri
USD / INR exchange rate - Rs.
l slowdown of inflation in the
output.
46.0/USD (Q2, 2010-11) coming months, a further rate hike
by RBI during the policy review Two, inflationary situation.
n
Bank credit growth - 19.5 percent
l
appears unlikely at this juncture. The headline inflation
(Q2, 2010-11)
They also feel that such frequent continues to remain
Economists' views on rate hikes could derail the growth stubbornly high. The recent
momentum the economy is fuel price revision will have
Expected monetary policy action
l witnessing presently. an inflationary impact in the
by the RBI. Majority of economists months ahead. Economists
feel RBI would continue to move Potential downside risks to
l
have pointed out that high
ahead on the path of monetary growth in 2010-11. Downside risks
prices are eating into the
tightening and anticipate a hike of to growth emanate from both
budget of the middle class
25 basis points each in the repo domestic and global
population as far as their
rate and reverse repo rate in July developments.
outlay for industrial produce
27, 2010. Given the present Domestic factors that could
v is concerned. Thus if inflation
liquidity situation, a hike in CRR on pull down growth include persists at the current levels
July 27, 2010 was however ruled for a long time or if there is a
out by the participating One, progress and spatial
n
sharper than anticipated
economists. distribution of the monsoon.
pick-up in inflation then
Data shows that cumulative
Surveyed economists feel non- consumption demand could
rainfall in the country
food manufacturing inflation is get dampened.
between June 1 and July 14
now rising at a fast pace and this was below normal by 13 Three, premature and
n
could be a source of worry for the percent. A less than aggressive monetary policy
RBI. Further, the full impact of the optimum monsoon would action. While normalization
fuel price revision on inflation adversely impact agricultural of the monetary policy is
numbers is yet to be seen growth. Even if the rains expected and RBI would
according to the economists. On were normal this year, continue to tighten rates in
the growth front, surveyed the months ahead,

36 FICCI's Banking & Finance Journal


SURVEYS

premature and aggressive will get hit) and in turn affect Although inflation would after some
rollback of easy money policy GDP performance. time trend downwards, but a good
can jeopardize growth. Rapid number of economists expect that
Two, high commodity prices.
n
tightening of monetary policy by December 2010, headline
High commodity prices
will affect both consumption inflation rate would continue to be
including crude prices is also
and investment demand and in the range of 6 percent to 8
being seen a risk to India's
this could ease the growth percent.
growth in 2010-11 by a small
impulses.
set of economists. Looking at the prognosis for the two
n Four, social unrest leading to key components - primary articles
Inflation situation. Majority of the
l
output losses. Given the and manufactured articles - the trend
economists do not expect
recent pick up in naxal is expected to be the same as for
inflation rate to fall to the 5
activities there is a fear that overall inflation. The only difference
percent mark by end December
greater social unrest in times being that primary inflation will start
2010 as estimated by the
ahead may also lead to to cool down from July / August 2010
government. The general view is
output losses and thus impact onwards as the 'negative base affect'
that headline inflation would
the growth trajectory. will come into play then and
continue to remain around the
manufactured articles inflation would
External factors that could pull
l present levels for the next few
trend down from November 2010
down growth include months and then gradually trend
onwards as it was in November 2009
downwards. There are three broad
n One, uncertainty regarding when manufactured goods price
reasons which economists feel
global recovery. There are index had shown a spike. Besides this
would prevent headline inflation
evident concerns with regard base effect, some of the other factors
from coming down at least in the
to developments taking place that should help ease inflation later
next one or two months -
in the Euro Zone. Many this year include -
believe that the next shock to v Impact of recent hike in the
v Low probability of further high
the capital markets could fuel prices - Fuel price hike will
MSP hikes (Primary articles
come from evolving situation add to the transportation cost
inflation)
in the Euro area. This could for primary articles as well as
increase volatility in capital increase the input costs for v Slowdown in global growth
flows and restrict availability manufactured goods. which would keep a lid on
of funds for supporting commodity prices particularly
v Sticky food inflation - Spatial
growth. Besides Euro area, those of industrial metals
distribution of monsoon will be
economists are also skeptical (Manufactured articles
a key factor under watch here
about the direction of the US inflation)
economy. There is a slight v Depreciation of INR which is
chance, some believe, of US preventing any meaningful
economy getting into another reflection of lower global prices
recession. This, if it happens, in metals on inflation rate in
will put a cap on our export India
growth (services sector like IT

FICCI's Banking & Finance Journal 37


SURVEYS

FICCI Quick Survey on


Yuan Exchange Rate
Flexibility – July 2010
Executive Summary one of their priorities at the G20 currency through heavy intervention
summit. By announcing its decision by its central bank.
Just before the meeting of the heads to make Yuan exchange rate more
of state of the G20 countries in Nevertheless, this development
flexible just days before the G20
Toronto, authorities in China merits attention and calls for an
summit, China was able to deflect
announced that they would impart evaluation of what implications
some of the criticism it was facing.
greater flexibility to their exchange would a more flexible yuan entail. It
rate management. This This signaling on part of China to end is also important to recall that in the
announcement caught the attention the dollar peg and its willingness to past China has expressed a desire to
of policy makers worldwide. let the Yuan appreciate has evoked a broaden the global reserve / vehicle
mixed response from leaders currency pool. And in the process it
Evidently, in the run up to the G20 worldwide. In its initial reaction the proposed the use of Renminbi
meeting in Toronto, Canada, there international community welcomed alongside other reserve currencies
was significant international pressure this move. However, soon there were like the US$ and the Euro. To get the
building on China to review its apprehensions expressed on whether
exchange rate stance as many this move was an indication of
believed that China's exchange rate China's intent to meaningfully
policy was one of the factors that contribute to the global rebalancing
were holding back global growth effort or was it only to steer
from gaining momentum. Voices of attention away from this issue ahead
dissent were particularly sharp in US of the crucial meet at Toronto. This
and EU, both of which were finding it skepticism arose because China did
difficult to manage their large trade not promise a one off revaluation
deficit with China. Leaders from US against the US$ or a free floating
and EU had indicated that discussion currency. Details that followed
on exchange rate management and subsequently showed that China
attended global imbalances would be would continue to manage its

38 FICCI's Banking & Finance Journal


SURVEYS

process kick-started, China Majority view is that China's


n the trigger for the
introduced cross-border transactions announcement to return to the announcement.
using Yuan in Shanghai and pre-crisis arrangement of
Domestically, a stronger
n
Guangdong in July last year, to reduce managing its currency is merely a
exchange rate would
reliance on the US dollar. Now china token of 'intent' rather than a
has decided to expand settlements of firm commitment to strong v Help in transforming the
international trade using yuan to action on the exchange rate growth structure from being
other provinces and cities, which is a front. export led to domestic
testimony to China's ambition of consumption driven as
While a more flexible Yuan would
n
taking Yuan to a more globalized imports would become
help in correcting global
platform, one day. Hence the decision cheaper
imbalances and safeguard fragile
to have greater flexibility in exchange
global recovery, this latest v Help tackle the inflation
rate management could have a
announcement by People's Bank situation, which is
bearing on this as well. Additionally,
of China (PBoC) would do little to increasingly becoming a
any sideways movement in Yuan's
address the issues at hand,as cause for concern
value will also affect the
PBoC will continue to 'manage'
competitiveness of exporters from Externally, by allowing its
n
the currency.
other countries. currency to be a little flexible,
To have a more meaningful
n China has managed, albeit
To gauge how leading economists
rebalancing of the global temporarily, to douse trade
from India are viewing China's
economy, China should first allow tensions with the US and EU as
announcement of having a more
a one off appreciation of at least well.
flexible exchange rate and what they
8 to 10 percent and then follow it
think could be the ramifications of
up with a floating currency
such a move, FICCI conducted a quick
regime.
survey amongst and had detailed
discussions with a group of Economists' views on the intent
l
economists. The feedback gathered behind China's decision on Yuan
from and views expressed by flexibility - A conscious effort to
economists are presented in the invigorate domestic demand or
following pages. a move to douse trade tensions

The findings of the survey represents Both domestic compulsions and


n
the views of the leading economists external pressure were
and do not reflect the views of FICCI. responsible for China to allow its
currency to float within the intra-
Survey Highlights day trading band of +/- 0.5
percent. It is an occasion when
Economists' views on
l
global objectives coincided with
significance of China's
Chinese objectives and this was
announcement of having a more
flexible currency

FICCI's Banking & Finance Journal 39


SURVEYS

Economists' views on whether


l Establish direct currency
v including India, as they will be
Yuan could actually depreciate exchange mechanism and able to garner a proportionately
instead of appreciating as settle trade in Yuan with higher share of the gains
widely felt different countries, especially resulting from global recovery in
its close trade allies trade.
Unanimous view amongst
n
economists is that the general Improve the depth of its
v In case of India, the Renminbi
n
trend for Yuan's value has to be bond markets appreciation will be of particular
one of appreciation. Economists significance as it could help
Make Yuan a convertible
v
have ruled out the possibility of correct, at least partially, the
currency on the capital
the Yuan depreciating at least in growing trade deficit with China.
account
the next couple of years. Possibly
Indian manufacturing units in the
n
over a longer time horizon, Ensure domestic trade and
v
heavy engineering and power
chances of Yuan depreciating investment practices are at
segments will also become more
exist and this would happen only par with those of the
competitive vis-à-vis imports
if China's growth were to witness advanced economies of the
from China if Renminbi were to
a setback. world
appreciate as expected.
Economists' views on Yuan /
l Strengthen the financial
v
Finally, an appreciating Chinese
n
Renminbi as an additional sector
currency will also give a boost to
global reserve currency
Economists' views on
l Indian investments in China and
The process for making Renminbi
n macroeconomic impact on India possibly open up new markets
a global reserve currency cannot of ongoing currency for service sector exports.
be immediate and will need a lot readjustment by China
of effort and time. We may have
Going by past experience, when
n
to wait for at least a decade
China allowed the Yuan to
before Renminbi becomes a
appreciate by almost 21 percent
global reserve currency.
between 2005 and 2008, most of
Chinese government will have to
n the economists FICCI spoke too
make a number of structural said that even this time the pace
changes before Renminbi can be of appreciation in not going to be
considered for entry into the very different. In fact there is a
elite league of global reserve consensus that over the next
currencies. Steps China needs to twelve months the Yuan might
take for making Renminbi eligible move up (appreciate) by about 5
for global reserve currency status percent. There is feeling among
include - economists, that benefits will
accrue over a longer period of
Pursue inclusion of Yuan in
v
time to developing economies,
the SDR basket

40 FICCI's Banking & Finance Journal


SYNOPSIS OF PAST EVENTS

FICCI's Health Insurance Conference:


30th July 2010, New Delhi

FICCI organized its second edition


conference on "Health Insurance" on
30th July, 2010, at FICCI Federation
House, New Delhi. Mr J. Harinarayan,
Chairman, IRDA delivered the
Inaugural Address at the conference.

FICCI has been deeply engaged in the


Health Insurance space through its
Advisory board on Health Insurance
supported by senior representatives
from IRDA, QCI, Healthcare Providers,
the Health Insurance companies,
World Bank and other key
stakeholders. The focus of this year's
conference was to disseminate the
work that FICCI's Advisory Board on
health insurance has accomplished.
This includes:

o "Promoting Quality Healthcare


through Health Insurance"

o " Standardisation of Billing


Procedures in Hospitals"

o " Standardisation of TPA/Insurer


and TPA/Hospital Contracts"

FICCI's Banking & Finance Journal 41


SYNOPSIS OF PAST EVENTS

Seminar on Disaster Management:


August 11, 2010

A one day program was held on 'Role


of insurers and reinsurers in
achieving the objectives of National
policy on Disaster management' on
August 11, 2010 at FICCI, New Delhi.
Mr. J. Harinarayan, Chairman, IRDA
has agreed to deliver the keynote
address.

The overarching goal of the


conference was to determine the
collective role of the government,
NDMA and IRDA in disaster
management. By aggregating views
on past experiences, the conference
strived to lay out a plan to devise
insurance products so as to enable
participation of affected persons.

The conference participants included


eminent representatives from both,
Life and Non-Life insurance,
Insurance brokers, Re-insurers,
Surveyors, Actuaries, Corporate
sector, Academia, Media and other
stakeholders related to the area of
disaster management

42 FICCI's Banking & Finance Journal


FUTURE EVENTS

9th Edition of FICCI-IBA Global Banking Conference:


Date: 7-9th September 2010
Venue: Hotel Trident, Mumbai

F ICCI and IBA are pleased to


announce the 9th edition of
FICCI – IBA Conference on
“Global Banking: Paradigm Shift”.
The conference will play an important
with outstanding content, speakers
and organisation, the forum would
once again provide a key platform for
the financial services industry
experts not only to gain insights
The theme of this years' conference
is: “Banking 2020: Making Decade's
Promise Come True.”
Day 1
1. Inauguration
role in defining the shape of the about changing consumers
economy in the next decade. This behaviour, regulatory developments 2. Setting expectations: Promise of
the decade and role of banks
requires SWOT analysis of the banking and forecasts of the future economic
system vis-a-vis its global landscape but also to interact with 3. Giving wings to corporate
counterparts, identifying the road the movers and shakers of financial aspirations
blocks and defining the road map services industry. 4. Special Session with Lord James
ahead. Sasoon
Key Stakeholders – The conference
Globally, the financial sector will aim to bring together the 5. Infrastructure finance: Breaking
regulations are undergoing a shift and following at this platform. the deadlock
are surely going to have an impact on Day 2
v Executives of the Banking and
the banking sector across the globe. 1. Setting new paradigm in
Financial Services sector
This forum will therefore look at the regulation
evolving framework & it's possible v International Banking and
2. Transactions in the next decade:
impact and also provide necessary Financial Services Companies Faster, cheaper, easier
inputs in defining the financial foraying into India
3. Supporting the inclusion
regulatory architecture.
v Policy makers and regulators aspirations: Rural and agriculture
Acclaimed by past attendees as an banking
v Financial and Commodity
industry-relevant world class event 4. SME finance: Broad basing the
Exchange Operators
growth pattern
IT vendors and technology
v
Day 3
providers
1. Preparing Indian banks for global
Private Equities and Venture
v competitiveness - consolidate or
Capitalists not

Fund Managers and Institutional


v 2. Retail Finance Act II :Funding the
Investors dreams of Indian households
3. Mumbai as finance hub in the
Consultants and Analysts
v
new world reality
Corporations
v 4. Valedictory
Educational Institutes
v

FICCI's Banking & Finance Journal 43


FUTURE EVENTS

Seminar on IFRS:
September 2010, New Delhi

Indian Accounting Standards are to reporting transparency, better It is with this in mind that FICCI
converge with IFRS in phases comparability of performance and proposes to organize a conference on
beginning with the financial year reduced reporting requirements the subject matter with a view to
commencing 1st April 2011. While among others, the process also raises highlight and better understand the
there are significant benefits to be a few challenges in terms of the various issues of concern that could
gained from the process of 'carve outs' that need to be created, possibly arise as a part of this
convergence including greater as well as practical difficulties in the transitionary process in the coming
implementation process. months.

'Empowering India's MSME Sector':


18th September 2010, Ahmedabad
The role of micro, small and medium plant and machinery as also for units and to analyze the credit needs
enterprises (MSMEs) in the economic working capital, etc. Availability of of Indian SME's and possible
and social development of the timely credit at reasonable rates is solutions. This seminar would also
country is well established. However, the need of the sector. throw light on concerns pertaining to
finance is one of the key issues marketing issues, availability of
With this seminar, FICCI aims to
hampering the growth of MSME labour as well as infrastructure,
facilitate dialogue between Bankers
sector. MSMEs primarily rely on bank technology, skill development and
and Lenders to create awareness and
finance for a variety of purposes Taxation issues
analyze practical problems of MSME
including purchase of land, building,

FICCI's Conference on Pension:


October 2010, Mumbai
FICCI is planning to organize a one- representations on behalf of industry issues and challenges facing the
day conference on “Pensions” during to encourage proper pension reforms sector, and lay down a strong
October 2010 at Mumbai. FICCI has in the country. The purpose of this foundation for the future direction of
been keenly involved in the conference is to facilitate dialogue the industry.
development of this sector in India among stakeholders on key policy
and has made several

44 FICCI's Banking & Finance Journal


Federation of Indian Chambers
of Commerce and Industry

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August, 2010

Issue : 3

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